Standard Life Annuity Purchase Fund - What's Going On

zagfles

OldScientist said:

arnoldy said:

HappyHarry said:

The fund will be heavily invested in government bonds. These tend to fall in capital value as interest rates rise. However, the annuity income you can purchase also tends to rise in value when interest rates rise. The purpose of the fund is to protect the annuity income that you could purchase at retirement. So as your fund falls, so the annuity income you can purchase rises and vice versa.

The industry tends to put out the propaganda that because the annuity rates increase as your fund drops it does not matter. This conveniently ignores 10% inflation, and the fact that if you just had the money "under the mattress" the annuity would be far far bigger.

The vast majority of annuities are very dangerous products (for the customer not the Industry), that is because they are sold as "safe" and mitigate "longevity risks" but probably <<< 1% are inflation proofed with full spouse benefits. Go figure a product designed to last the rest of your life without inflation proofing.

On your second point, there are probably a number of reasons why so few inflation linked annuities have been sold in recent years:

1) Inflation higher than 5% was a distant memory (late 1980s and early 1990s for CPIH, and briefly came close to touching 5% in September 2008) and the current levels of high inflation were largely unexpected.
2) Until recently, annuity rates were pretty dreadful (e.g. in January 2021, the payout rate on a single life RPI linked annuity for a 65yo was 2.8% compared, at the time, to 5.0% for a level annuity)
3) The difference in level rates compared to RPI rates - even now with rates of 4.4% and 6.8% (according to https://www.hl.co.uk/retirement/annuities/best-buy-rates ) , mean that for many people taking more money now than later is tempting while only 2 years ago, you would have got nearly twice as much income with a level annuity.
4) Coupled with Point 3 is that people often tend to underestimate how long they are going to live for (e.g. there is just under a 10% chance that one or other or both of a 65 year couple will live to 100 - so planning for a 30-35 year retirement might be prudent). However, even with inflation at 'only' 5% it takes 10 years for the real income from the level annuity to fall below that of the RPI annuity with current rates (although 16 years for 3% inflation).

All of which suggests that there is a need for education, the provision of which at least is improving (e.g. https://www.moneyhelper.org.uk/en/pensions-and-retirement and, of course, this forum and site). The problem is that, for most people, the details of pension planning are not all that interesting (at least until close to retirement)!

And to be fair to pension providers (like Standard Life) a lifestyling option (which does have 'annuity purchase' in the title) is never going to be the best option in all market circumstances. Your are correct, over the last year or so, keeping it under the mattress would have been better than investing in either bonds or stocks, but few predicted that beforehand and it would have required active management.

I think the bottom line is that people just don't understand inflation risk. Their view of money is something that is mainly static in value, their view of eg a £10k income is the same now as it was 5 years ago. We had people at work excited about a 5% payrise when inflation is 10%! They actually think they are richer!

You also get useless comparisons of breakeven points between index linked and level annuities, based on guesses about inflation. You may as well compare savings accounts returns with global equity fund returns.

Someone who bought a flat annuity in 1970 paying £1000 a year would have had easily enough at first - around the average income at the time. My student grant was far more than £1000 in the early 80's, you'd likely starve on the 1970 average wage in 1980. 

I'm not saying 1970s inflation is going to come back and last as long as it did then. Or that it's even likely. But it happened then, it could happen again, and it could be far far worse as we've seen in other countries. When we went to Turkey in the late 90s we were paying for meals with million Lira notes, and Turkey isn't even the most extreme.

Annuities are supposed to be the "risk free" option. Level annuities are not risk free.

zagfles

HappyHarry said:

arnoldy said:

HappyHarry said:

The fund will be heavily invested in government bonds. These tend to fall in capital value as interest rates rise. However, the annuity income you can purchase also tends to rise in value when interest rates rise. The purpose of the fund is to protect the annuity income that you could purchase at retirement. So as your fund falls, so the annuity income you can purchase rises and vice versa.

The industry tends to put out the propaganda that because the annuity rates increase as your fund drops it does not matter. This conveniently ignores 10% inflation, and the fact that if you just had the money "under the mattress" the annuity would be far far bigger.

The vast majority of annuities are very dangerous products (for the customer not the Industry), that is because they are sold as "safe" and mitigate "longevity risks" but probably <<< 1% are inflation proofed with full spouse benefits. Go figure a product designed to last the rest of your life without inflation proofing.

Are you are aware that annuities have inflation linked options as well as spouses benefits?

Annuities are not dangerous products, in fact they are an incredibly safe product for those that are risk averse. If an individual chooses a non-inflation linked single life annuity, then yes, it would often be a poor choice. This is one reason why taking advice on annuity options would be beneficial for many retirees. Another reason to take advice of course is that advisers will usually be able to get better rates than the individual can.

To call annuities "very dangerous products" is really a little daft and over dramatic.

The PP is clearly aware that index linked/spouse protected options exist as he/she said that "probably <<< 1% are inflation proofed with full spouse benefits". I'm not sure whether that's right or not but I think it's true that the vast majority of annuities sold are flat. If you look at any site that compares annuities you'll see they mostly compare level or fixed escalation rather than index linked.

I think that was the point, level annuities which as you say are a "poor choice" seem to be the most popular. A bit like endowments a few decades ago I guess...

If inflation stays high wonder if level annuities will become the next misselling scandal?

Albermarle

drlabman said:

Thanks everyone.  That makes sense.  I just checked the value of my fund and it's gone down even since the annual report at the end April.

Now, if you were me, what would you do?  I've set my target retirement date for later this year but I don't really need the money from this pension (I have others).  Should I defer further in the hope that the fund recovers (it's only going one way at the moment)?  I guess that's like asking for next week's lottery numbers.

I am afraid that the key point here, is that if you did not intend to buy an annuity at the target retirement date, then you should not have been in an ' Annuity Purchase Fund' 

If you intended to drawdown from the fund ( or not take it at all for a few years) you should have been in a fund that was a mix of different types of investments, including equities ( shares). This would have also dropped in the last 18 months, but not by anywhere near as much.

As historically most people bought annuities with their pension pots, the default investment ( where the customer has not chosen anything specific) was based on buying an annuity. This has gradually changed as not many people buy annuities anymore, so your issue is a kind of legacy problem. Unfortunately you can really blame the pension provider ( although they in general could have been more pro active) as  monitoring  pension investments are the customers responsibility, although of course the majority have no clue about this area.

It is very unlikely that gilts/bonds will decline much further, and long term should produce a positive return, but probably will never fully recover recent losses.

HappyHarry

zagfles said:

HappyHarry said:

arnoldy said:

If inflation stays high wonder if level annuities will become the next misselling scandal?

If advice has been given, and the warnings were not clear enough, then I am sure there will be successful complaints. However I suspect that most of the level term annuities will have been purchased without advice, which will limit the number of potential misselling complaints.

zagfles

HappyHarry said:

zagfles said:

HappyHarry said:

arnoldy said:

If inflation stays high wonder if level annuities will become the next misselling scandal?

If advice has been given, and the warnings were not clear enough, then I am sure there will be successful complaints. However I suspect that most of the level term annuities will have been purchased without advice, which will limit the number of potential misselling complaints.

I've heard anecdotally of people going to advisers wanting an inflation protected annuity and being persuaded to get a level one based on charts showing break even/cut over points etc!

Do you know what proportion of annuities sold via advisers are index linked?

JohnWinder

Albermarle said:

It is very unlikely that gilts/bonds will decline much further, and long term should produce a positive return, but probably will never fully recover recent losses.

I don’t think it’s as grim as that. Here’s some modelling of what happens as interest rates rise. The higher yields make good the capital losses.
https://www.bogleheads.org/forum/viewtopic.php?p=6922325&sid=b295fc5fc142a2fe94a80c394c93ca14#p6922325

HappyHarry

zagfles said:

HappyHarry said:

zagfles said:

HappyHarry said:

arnoldy said:

If inflation stays high wonder if level annuities will become the next misselling scandal?

If advice has been given, and the warnings were not clear enough, then I am sure there will be successful complaints. However I suspect that most of the level term annuities will have been purchased without advice, which will limit the number of potential misselling complaints.

I've heard anecdotally of people going to advisers wanting an inflation protected annuity and being persuaded to get a level one based on charts showing break even/cut over points etc!

Do you know what proportion of annuities sold via advisers are index linked?

As with all individual cases, there will have been times when a level annuity was the most appropriate for a client. Providing correct advice was given at the time, then there should be no concern.

However, if an adviser has provided bad advice and dissuaded a client from taking a better path, then the client has a complaints process available to them. If there are advisers out there deliberately giving bad advice in this area - (I can't understand why they would as there would be no benefit to the adviser) then I have little sympathy with them.

I do not know what proportion of advised annuities are index linked or contain spouses benefit, though I would suspect the proportions would be far higher than than for non-advised annuities.

dunstonh

Even if annuities were classed as missold, it we look a the last 30 years, there are very few periods where inflation was high enough to make an index linked annuity better than level over their lifetime.

Annuity providers would price all annuity options based on what they would pay out over the life expectancy.     You would need a sustained period of inflation above the long term average for it to make a difference worth complaining about.    Typically, with inflation around 2.5%, an indexed annuity would take around 23-25 years to breakeven to a level.

Annuities bought in the late 90s or early 2000s on level basis are still likely to better than an inflation linked annuity due to the long period of below-average inflation. 

Unless you have a long life, its not likely to be make much difference.

I just took a recent quote for RPI vs level comparison for a 75 year old and modelled it at 5% p.a. RPI, the RPI quote would only have got to the level price at 86 and the cumulative amount paid out hit breakeven at 94.  If RPI settled at 3% p.a. it would take until age 92 to match the level and still would not have exceeded the cumulative amount paid by 106.

zagfles

dunstonh said:

Even if annuities were classed as missold, it we look a the last 30 years, there are very few periods where inflation was high enough to make an index linked annuity better than level over their lifetime.

Annuity providers would price all annuity options based on what they would pay out over the life expectancy.     You would need a sustained period of inflation above the long term average for it to make a difference worth complaining about.    Typically, with inflation around 2.5%, an indexed annuity would take around 23-25 years to breakeven to a level.

Annuities bought in the late 90s or early 2000s on level basis are still likely to better than an inflation linked annuity due to the long period of below-average inflation. 

Unless you have a long life, its not likely to be make much difference.

I just took a recent quote for RPI vs level comparison for a 75 year old and modelled it at 5% p.a. RPI, the RPI quote would only have got to the level price at 86 and the cumulative amount paid out hit breakeven at 94.  If RPI settled at 3% p.a. it would take until age 92 to match the level and still would not have exceeded the cumulative amount paid by 106.

OMG. See what I mean about "break even/cut over points etc!"

Obviously, using hindsight, you can say over the last 30 years flat annuities would usually have been better than index linked.

Equally, you could say drawdown invested in global equity funds would have been better than any annuity (assuming today's pension flexibilities).

It's not about what option will/would have given you the most lifetime income! The point is, annuities are sold as safe guaranteed products. High inflation is a risk. Stockmarket downturns are a risk. Flat annuities, drawdown invested in equities, are both a risk. A risk that would have paid off over the last 30 years. But not at other times. The future? Who knows.

If you want what the recent past suggests is most likely to give you most lifetime income, use drawdown. If you want safe guaranteed real income, use index linked annuities.

There would have been no endowment misselling if they'd all performed as expected using past performance as a guide.

flaneurs_lobster

As someone who most here would consider "financially unsophisticated" this whole discussion gives me the fear.

I'm sitting on £400Ks-worth of deferred workplace pensions and I'm 6mths out from my 66th birthday and I have no real idea what I should do with that cash.